OLYMPIA, Sept. 18.—All-out battle between the Department of Labor and Industries and the state’s business community was averted Monday as the agency revealed its worker-comp tax proposal for 2013. There won’t be a massive increase in taxes next year. In fact, there won’t be an increase at all, for the second year in a row – not even for inflation.

The rate proposal still must go through a formal hearing process next month, with final approval in November, but that seems almost a formality now. And it’s quite a twist. Business interests had been whipped into a fine froth by an earlier suggestion that the agency might need an enormous rate increase next year to meet its own target for fiscal soundness. In June a staff actuary suggested the price tag could be as high as $3.1 billion – a figure that might have required a 19 percent increase, sustained over 10 years. It was an idea that caused jaws to fall open — not just because the increase was a whopper, but also because it was an election year.

But on Monday, as the agency released its formal proposal, a bit of magic with the math and a few changes in assumptions appeared to do wonders. The agency also is reporting improved performance in its insurance program for injured workers, and it says a reform program adopted by the Legislature in 2011 is returning better than expected results. So now the agency has a new plan. There would be tax increases, but they wouldn’t start until 2014. The scheme outlined by agency director Judy Schurke Monday would ratchet up rates gradually over the next decade, no more than 5.5 percent each year, and it would set a somewhat lower target – some $2.7 billion. The key thing is that the debate has been put off another year, until after the election.

The rate proposal was unveiled Monday at a meeting of the agency’s worker compensation advisory committee, a gathering attended by representatives of nearly every business trade association active at the statehouse. From around the room came sighs of relief.

Created a Panic

Members of the Worker Compensation Advisory Committee watch the presentation.

“I think there were a lot of us who were expecting a huge increase, given the 19 percent figure they talked about a few months ago,” said Scott Dilley of the Washington State Farm Bureau. And there were some who wondered why L&I didn’t lay things out this way in the first place. Said Jan Gee of the Washington Food Industry Association, “If I were with the department I probably would have handled that presentation differently, rather than basically creating a panic in the employer community.”

Kris Tefft of the Association of Washington Business, the lead lobbyist on the business side, said the department appeared responsive to business concerns. As for Schurke’s long-term proposal, he said, “There’s no signing in blood, but I think we can work year to year with this plan.”

Schurke said she intended the plan as a compromise. She said a big tax increase has to come eventually, to restore the state-run insurance program to standards of fiscal soundness. The agency drew down its reserves during the recent recession to reduce the big tax increases that would have been required by fast-rising claims costs. The agency also maintains it should adopt more realistic assumptions about investment returns when setting aside money for pensions. Schurke’s plan would gradually reduce the pension “discount rate” from 6.5 percent to 4.5 percent, which will increase costs for the state program and for self-insured employers that must abide by the state’s calculations when pensions are awarded.

“What I heard from the business side of the table was to make it as long and as predictable and gradual as possible, to try not to have a spike in 2014 as we were seeing in many of the scenarios that we went over in June and July. And what I heard from labor was to make sure that we really stick to a plan that keeps building a contingency reserve that is adequate.”

By the end of the year, the program will have a reserve of $590 million, about 5 percent of liabilities. A more prudent target would be nearly triple, at 14 percent, Schurke said. The earlier figures were based in part on a target of 19 percent.

Rebecca Johnson, representing the state Labor Council, said labor might have preferred a higher level – and thus a bigger increase in taxes – “but as a framework this looks really responsible.”

L&I Credits Reform Program

Labor and Industries director Judy Schurke.

Behind the debate over this year’s rate is the long-term argument between business and labor over whether the state program is being managed efficiently and effectively. Washington is one of just four states that maintain a state-run monopoly for workers’ compensation insurance; other states either allow private competition or have turned their programs over entirely to private insurance companies. In this state, only the largest employers are able to go their own way, by self-insuring. There are big differences between the Washington program and those in other states that make it difficult to compare efficiency. But the central business-community argument has been that the Washington program has little incentive to get workers back on the job quickly and aggressively investigate allegations of false permanent-injury claims.

In 2010, the Building Industry Association of Washington sponsored an initiative that would have allowed private competition, but it was defeated at the polls. The next year, business interests convinced the Legislature to pass some relatively modest reforms, including “structured settlements” for older workers – rather short of the lump-sum buyouts permitted in most states. Figures released at the meeting Monday indicated that only a relative handful of settlements have been awarded, 16 since the program began in January. But the department said the reform program overall has been a bigger success than anticipated, allowing it to book $1.5 billion in savings over four years, rather than the $1.2 billion it assumed earlier. Some $162 million in savings will be ascribed to 2013.

Other savings cited by the department include fewer claims in high-hazard industries, less-frequent claims, quicker claims processing and relatively slow growth in medical costs. The upshot is that the department could break even with a 4.2 percent decrease in rates. By keeping the rates steady, the department says it will be able to allocate $82 million to rebuilding reserves.

“Had the governor and the Legislature not adopted the 2011 reforms, I wouldn’t be making this proposal today,” Schurke said. “In fact, without those reforms, we would be facing a rate increase. Instead, we’re able to keep rates down for Washington’s businesses and workers.”

Gov. Christine Gregoire issued a statement: “Today’s announcement is proof that our reforms in workers compensation are working – and is a testament to the tireless effort to provide businesses and employees what they’ve been asking for. Both business and labor have called for reduced costs, stability in workers compensation rates and an effort to build up the trust fund reserves. I’m pleased that we’ve been able to achieve all three.”

But of course there are skeptics. Patrick Connor of the National Federation of Indpendent Business said last year’s modest reforms appear to be holding off a tax increase, at least for now. But he said, “If such half-hearted measures, that have only been partially implemented, can save a billion and a half dollars, imagine how much real reforms – or privatization – could save employers and workers in this state. It could free up billions of dollars for job creation and mean more take home pay for working families. Let’s hope the Legislature and the next governor are paying attention.”